George Stigler, the First Apostle

of the “Coase Theorem”

Elodie Bertrand

Introduction
Counterintuitive it may be, but we owe the “Coase theorem” not to
Ronald Coase himself but to George Stigler.
In a passage in his article “The Federal Communications Commission”,
Coase (1959) argued that, like any other private good, and despite the
risk of interference, radio frequencies could be allocated through prices,
thus questioning the Pigovian tradition of externality analysis. Judging
this point to be erroneous, Aaron Director, editor of the Journal of Law
and Economics, asked Coase to abandon it, which he refused to do. He
explained his point of view during an evening discussion with, among
others, Director, Milton Friedman, and George Stigler. Coase’s arguments
convinced the participants, and he wrote “The Problem of Social Cost”
(Coase 1960) to develop them further. There, he asserted that in the

E. Bertrand (*) 
CNRS, Institut des Sciences Juridique et Philosophique de la Sorbonne
(UMR 8103, CNRS & University Paris 1 Panthéon-Sorbonne),
Paris, France
e-mail: Elodie.Bertrand@univ-paris1.fr
© The Author(s) 2020 445
C. Freedman (ed.), George Stigler, https://doi.org/10.1057/978-1-137-56815-1_15
446    
E. Bertrand

presence of externalities, if transaction costs are nil and if property rights

are well defined and allocated, then agents will negotiate and the result
will be optimal and independent of the initial allocation of rights. Stigler,
who was converted1 during this legendary night, assigned the name “the
Coase theorem” to this assertion in the third edition of his Theory of Price.
Yet, he stated it differently, as follows: “under perfect competition private
and social costs will be equal” (Stigler 1966: 113).
This name was inappropriate for two reasons. First, Coase’s (1960)
article did not state a theorem but only used examples, exactly as Stigler’s
textbook did. Second, the main part of Coase’s article explores the con-
sequences of the introduction of transaction costs. When they are not
nil, the result may no longer be optimal or independent from the initial
allocation of rights, which means that other solutions (such as govern-
mental intervention) may be less costly and that law exerts an influence
on economic output. This is why Coase distanced himself from this
“theorem”: “It took a whole evening of all these economists to get it
right. But then in the end they didn’t get it right, because they amended
something called the Coase Theorem, which I don’t like” (Coase 2012).
The name coined by Stigler was, however, taken up by economists
to examine the consequences of this idea. Beyond its criticism of the
traditional analysis of externalities, the “Coase theorem” is important
in economics. It calls into question the theory of market failures and
reasserts the efficiency of the market; and it puts the emphasis on the
necessity of introducing property rights. The “theorem” and the article
which originated it became imprinted on the infant discipline of envi-
ronmental economics, and contributed to the transformation of Law
and Economics in the 1970s (Medema 1998, 2014). Stigler (1992:
456) wrote in this regard: “In the field of law and/or economics, B.C.
means Before Coase. B.C., the economists paid little attention to most
branches of law. A.C., ‘The Problem of Social Cost’ became the most
cited article in the literature of the field, perhaps in the entire literature
of economics. Law, like other social institutions, came to be viewed by
economists as an instrument for the organization of social life”.
The name “the Coase theorem” had appeared in a textbook, and
was inappropriate; but it remained nonetheless. It remained because
it transformed an intuition—newly discussed in the research literature
 George Stigler, the First Apostle of the “Coase Theorem”    
447

and far from being accepted—into a theorem, giving it some persua-

sive power. It remained because it focused the economists’ attention on
the zero-transaction-costs world, a world with which they were already
familiar, and which was easier to handle.
There was no demonstration in Coase’s original article, and there
have been multiple post-Coasean “Coase theorems” as interpretations
of Coase’s idea and examples, Stigler’s being the most prominent. Coase
made clear that the “Coase theorem” was just a first step in the analy-
sis, and that economists should study the world of positive transaction
costs. But Stigler, albeit conscious of this, helped shift the focus to the
zero-transaction-costs world of the “theorem”. Then the “Coase theo-
rem” took on a life of its own, autonomous from Stigler and Coase. This
story is now well known (Medema 1994; Bertrand 2010), yet it has rarely
been asked what Stigler’s “Coase theorem” actually was. Steven Medema
(2011) has examined the evolution of Stigler’s attitude toward external-
ities and the “Coase theorem”, and compared it with Coase’s own. He
explains what he perceives as Stigler’s fascination with the “Coase theo-
rem” (whose unrealism is entirely recognized) by reference to the facts that
it is an argument for negotiated solutions, and that it puts the stress on
the necessity of studying transaction costs and the law. Alain Marciano
(2018) argues that Stigler transformed the “Problem of Social Cost” into
a general statement, making it consistent with his own methodology, and
conception of economics as a science. I will answer these questions more
specifically: since the “Coase theorem” is an unidentified object in eco-
nomic theory, which theorem is Stigler’s “Coase theorem”? What are its
assumptions and how is it argued for? What are its consequences?

The Story of Stigler’s Conversion

The Ancient Faith

Pigou was interested in divergences between the private and the social
products of a good or service. In “simple competition”, a divergence
occurs when “a part of the product of a unit of resources consists of
something, which, instead of coming in the first instance to the person
448    
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who invests the unit, comes instead, in the first instance (i.e. prior to
sale if sale takes place), as a positive or negative item, to other people”
(Pigou 1932: 174). In the case that interests us here (what would come
to be known as technological externalities), “one person A, in the course
of rendering some service, for which payment is made, to a second per-
son B, incidentally also renders services or disservices to other persons
(not producers of like services), of such a sort that payment cannot be
exacted from benefited parties or compensation enforced on behalf of
the injured parties” (Pigou 1932: 183).2 The government can suppress
this divergence by “extraordinary encouragements” or “extraordinary
restraints”, whose “most obvious forms” are “bounties and taxes” (Pigou
1932: 192). It can also intervene by direct regulation (Pigou 1932: 194).
This is this “Pigovian tradition” that Coase would incidentally call
into question in his article on the allocation of radio frequencies (Coase
1959), and then in “The Problem of Social Cost” (Coase 1960).3 Coase
later made clear that his “target (or targets) were the modern economists
who had adopted Pigou’s approach”, referring to Samuelson (1947) and
Stigler (1952) (Coase 1996: 117). In the second edition of his Theory of
Price, Stigler’s approach was indeed close to Pigou’s (see Medema 2011:
14). He was writing: “Some disharmonies between private and social
products are large and important, and they are dealt with by a variety
of techniques such as taxes and subsidies, dissemination of information,
and the police power (for example, zoning)” (Stigler 1952: 105). This
sentence is quoted by Coase (1996: 117) as an example of “pure Pigou”.

Coase 1959: The First Exposition of the New Faith

While at the London School of Economics, Ronald Coase had

become interested in the economics of public utilities, broadcast-
ing in particular. When he migrated to the United States in 1951, he
pursued his interest on this subject and studied American television
and radio broadcasting institutions. In “The Federal Communications
Commission” (Coase 1959) he argues that the definition of rights over
radio frequencies is sufficient for the price mechanism to operate. His
argument proceeds as follows.
 George Stigler, the First Apostle of the “Coase Theorem”    
449

First, for any good, once the property right is distributed, its final
allocation is determined by the market transactions. Coase suggests
this idea with one example. “Whether a newly discovered cave belongs
to the man who discovered it, the man on whose land the entrance to
the cave is located, or the man who owns the surface under which the
cave is situated is no doubt dependent on the law of property. But the
law merely determines the person with whom it is necessary to make
a contract to obtain the use of the cave. Whether the cave is used for
storing bank records, as a natural gas reservoir, or for growing mush-
rooms depends, not on the law of property, but on whether the bank,
the natural gas corporation, or the mushroom concern will pay the most
in order to be able to use the cave” (Coase 1959: 25). Coase here asserts
that the legal system is neutral with regard to final resources allocation
(the use of the cave). He also suggests that this allocation maximizes the
value of production since the person who acquires the right is the one
who offers the highest payment; that is, whoever values it the most.
Second, Coase broadens these ideas to the rights whose use implies
effects on others, with the example of the Sturges v. Bridgman case
(1879), which concerned a doctor whose practice was made difficult
because of the noise generated by his neighbor, a confectioner. In the
same manner, whatever the Court decision is, the right to work in
silence or to make noise will end up in the hands of the person who val-
ues it the most. “[T]he delimitation of rights is an essential prelude to
market transactions; but the ultimate result (which maximizes the value
of production) is independent of the legal decision” (Coase 1959: 27).
Retrospectively, Coase (1988: 158) will see in this assertion the “essence
of the Coase theorem”.
Director and others at Chicago were not convinced by this rebuttal of
the Pigovian analysis and asked Coase to delete this passage; he refused.
Instead, he insisted on discussing this argument with the members of
the Chicago faculty who objected to it, a discussion which took place
one evening at Director’s home, where George Stigler was present.
450    
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The Night of Conversion

The discussion took place with around twenty leading Chicago fig-
ures (among which, besides Coase, Director, and Stigler: Reuben Kessel,
Milton Friedman, Arnold Harberger). There are several accountings of
this famous night: by Coase himself (mainly in Coase 1993: 249–50),
by Stigler (1988), and a collective one (in Kitch 1983: 220–1). Stigler
recounts: “At the beginning of the evening we took a vote and there were
twenty votes for Pigou and one for Ronald … The discussion began. …
My recollection is that Ronald didn’t persuade us. But he refused to yield
to all our erroneous arguments. Milton would hit him from one side, then
from another, then from another. Then to our horror, Milton missed him
and hit us. At the end of that evening the vote had changed. There were
twenty-one votes for Ronald and no votes for Pigou” (in Kitch 1983: 221).
Stigler’s Memoirs make clear that the group agreed to assume zero
transaction costs and, in this world, was not troubled by Coase’s conclu-
sion of efficiency in the presence of externalities. They were much more
troubled by his conclusion that the result would be the same whatever
the initial distribution of rights. They “strongly objected to this heresy”
(Stigler 1988: 76). And it was on this element that they struggled, in
particular Stigler—who finally submitted and eventually popularized
this idea.
The conclusion of this night was a request by Director that Coase
develop more fully his argument in the Journal of Law and Economics
without reference to radio frequencies (Coase 1993: 250).

The New Testament: “The Problem of Social Cost”

“The Problem of Social Cost” (Coase 1960) thus developed the argu-
ment asserted in “The Federal Communications Commission”, and put
forward the claim that it depended on the assumption of zero transac-
tion costs (Coase 1988: 158).4
Coase’s (1960) article starts from the “case of straying cattle which
destroy crops growing on neighbouring land” (Coase 1960: 2). It first
makes clear that the problem under discussion is reciprocal: if there
 George Stigler, the First Apostle of the “Coase Theorem”    
451

were no cattle, there would be no destruction of crops; but if there were

no crops, there would not be any destruction either.
The first part of the paper assumes that “the pricing system works
smoothly (strictly this means that the operation of a pricing system is
without cost)” (Coase 1960: 2). In the first case studied by Coase, the
rancher has to pay for all damage caused by his herd: he does not own
the right to harm the farmer. Obviously, he therefore takes into account
the damage inflicted, hence the social cost of his actions. His choice of
output is then socially optimal.
To suggest that the result is independent of the initial allocation of
property rights, Coase now assumes that the rancher owns the right to
cause damage to his neighbor. In his example, the structure of the costs
entailed by the rancher is the same as before since cost is opportunity
cost. For example, Coase assumes that the value of the marginal damage
on the corn caused by a third steer is $3. Either the rancher has to pay
for all damage and he adds these $3 to his marginal production cost, or
he does not have to pay compensation and the farmer would pay him
$3 so that he diminishes his herd to two steers. “Whether the $3 is a
payment which the cattle-raiser has to make if he adds the third steer to
his herd (which it would be if the cattle-raiser was liable to the farmer
for damage caused to the crop) or whether it is a sum of money which
he would have received if he did not keep a third steer (which it would
be if the cattle-raiser was not liable to the farmer for damage caused to
the crop) does not affect the final result. In both cases $3 is part of the
cost of adding a third steer, to be included along with the other costs”
(Coase 1960: 7).
Note that there is a slight shift in the amount here (which will be
reproduced by Stigler). Why should the farmer pay $3 if the amount of
the marginal profit of the third steer would have been sufficient? In fact,
the amount of the payment from the farmer to the rancher is indetermi-
nate. It has to be superior or equal to the marginal profit of the rancher
(unknown here) and inferior or equal to the marginal damage ($3). The
opportunity cost of the third steer is therefore also indeterminate. But
Coase assumes that the farmer would pay the total marginal damage. In
other words, the rancher would obtain the entire surplus. This assump-
tion is implicit and appears as follows: “the farmer would be willing
452    
E. Bertrand

to pay up to $3 if the cattle-raiser would reduce his herd to 2 steers …

The cattle-raiser would therefore receive $3 from the farmer if he kept 2
steers instead of 3” (Coase 1960: 6–7, my emphases).
This shift allows Coase to conclude that in both initial allocations
of rights, the rancher faces the same marginal production costs, so the
physical result—the level of the externality—is the same as before. It is
therefore optimal and invariable. “The size of the herd will be the same
whether the cattle-raiser is liable for damage caused to the crop or not”
(Coase 1960: 7). Coase then asserts what most resembles a Coasean
“Coase theorem”: “It is necessary to know whether the damaging busi-
ness is liable or not for damage caused since without the establishment
of this initial delimitation of rights there can be no market transactions
to transfer and recombine them. But the ultimate result (which maxim-
ises the value of production) is independent of the legal position if the
pricing system is assumed to work without cost” (Coase 1960: 8). We
here have two assumptions—zero transaction costs and defined prop-
erty rights—and two conclusions—efficiency and independence.
However, the “very unrealistic” assumption of zero transaction costs
concerns only one-third of this article, and Coase quickly and explic-
itly pushes the reader beyond this world. “In order to carry out a mar-
ket transaction it is necessary to discover who it is that one wishes to
deal with, to inform people that one wishes to deal and on what terms,
to conduct negotiations leading up to a bargain, to draw up the con-
tract, to undertake the inspection needed to make sure that the terms of
the contract are being observed, and so on. These operations are often
extremely costly, sufficiently costly at any rate to prevent many transac-
tions that would be carried out in a world in which the pricing system
worked without cost” (Coase 1960: 15). Consequently, a bargain occurs
only if its gain is higher than the cost involved. If all the exchanges of
rights necessary to bring the optimal result do not take place, two con-
sequences follow.
First, the optimal result will not be achieved and solutions other than
the negotiation may lead to better results. Coase here provides an inno-
vative discussion on policy. Since “[a]ll solutions have costs” (Coase
1960: 18), it is necessary to compare different institutional arrange-
ments (integration in a unique firm, public regulation, status quo) in
 George Stigler, the First Apostle of the “Coase Theorem”    
453

terms of their net output values. In opposition to the comparison with

an “ideal world”, the Coasean method of policy design entails examin-
ing the initial actual situation and comparing the net values yielded by
alternative arrangements (Coase 1960: 43).
Second, the independence of the result is equally called into ques-
tion since the final allocation now depends on the initial distribution
of rights. Therefore, “the courts directly influence economic activity”
(Coase 1960: 19). It is his final conclusion on the influence of the law
and not its neutrality that in Coase’s view was important.

The Baptism

As noted by Medema (2011: 12), Coase’s conclusion in the z­ero-

transaction-costs world was already under discussion in the litera-
ture (Buchanan and Stubblebine 1962; Turvey 1963; Demsetz 1964;
Calabresi 1965) when Stigler (1966) gave it a name, changed its status
to a theorem, and inscribed it in a textbook. This was in the third edi-
tion of his Theory of Price.
In the chapter “Costs and Production”, after having argued that true
cost is opportunity cost, Stigler deals with the difference between pri-
vate cost and social cost: “One of the most tendencious questions in
economics has been: when social and private costs diverge apprecia-
bly, will competition lead to correct amounts (and prices) of goods?”
(Stigler 1966: 110). He uses the same example as Coase, of a rancher
and a farmer, and first approaches the problem in the traditional way.
If the rancher is not liable, the result is not optimal: “This is in fact an
instance of a general theorem: consumers will be best off (on the highest
indifference curves) when the relative prices of goods are equal to their
relative (marginal) social costs. Where private costs differ from social
costs, obviously this optimum position will not be reached, because
producers will gear output to their private costs” (Stigler 1966: 111).
Private and social costs will be equal only if the rancher was liable.
However, the problem can be seen in a reverse way. “[S]uppose …
that the area had originally been devoted to cattle raising and now a
wheat farmer enters. The argument is completely analogous, but this
454    
E. Bertrand

time we reach the conclusion that the wheat farmer should pay for the
fencing! It is his arrival which creates the problem of wandering cat-
tle, and therefore to get the true (social) cost of his wheat we should
take account of the damage he inflicts on cattle raisers if they should
for example have to erect fences” (Stigler 1966: 112). Here Stigler rec-
ognizes the reciprocity of the problem, but he calls it symmetry: “The
fundamental symmetry in the relations of cattle and grain farmers, no
matter where the law places the liability for damages, deserves elabo-
ration” (Stigler 1966: 112). Then, instead of elaborating on reciproc-
ity, this is the independence result that he develops (together with
efficiency).
If the rancher is liable, he will take into account the harm he inflicts
and the social cost will be minimized—in his example for 12 steers.
(Stigler will later say that “[s]ocial returns are maximized” Stigler 1987:
119.) In the case where the farmer is liable, the result is the same since
the structure of the rancher’s costs is identical—for the same reason as
in Coase (opportunity cost), and with the same shift. The farmers would
pay the total damage because they would pay up to the total damage.
Stigler writes: “For now the grain growers will offer him [the rancher]
sums equal to the marginal damage if he does not increase the herd. If
the herd is 12, for example, they will offer up to $4 if he will not add a
thirteenth animal. Since he foregoes this receipt by adding the 13th ani-
mal this is the cost (for costs are foregone alternatives). The manner in
which the law assigns liability will not affect the relative private marginal
costs of production of cattle and grain” (Stigler 1966: 113). This invar-
iant result is moreover socially optimal: “But this procedure obviously
leads to the correct social results— the results which would arise if the
cattle and grain farms were owned by the same man” (Stigler 1966: 113).
Finally comes the baptism of Coase’s idea. “The Coase theorem thus
asserts that under perfect competition private and social costs will be
equal” (Stigler 1966: 113). Stigler insists on the novelty of this prop-
osition, and certainly remembers the doubts with which he had first
received it: “It is a more remarkable proposition to us older economists
who have believed the opposite for a generation, than it will appear to
the young reader who was never wrong, here” (Stigler 1966: 113).5 It
is the independence conclusion that in his view is the most surprising:
 George Stigler, the First Apostle of the “Coase Theorem”    
455

“The proposition that the composition of output will not be affected by

the manner in which the law assigns liability for damage seems astonish-
ing. But it should not be. … The assignment of responsibility for dam-
ages … can be ignored: assume that the same farmer grows grain and
cattle, and it is obvious that his determination of output will be inde-
pendent of the assignment” (Stigler 1966: 113). The implicit argument
is therefore that the social optimum is unique, and that two agents will
act as one.
The assumption of zero (or low) transaction costs is made explicit
when Stigler details the consequences of the impossibility of negotia-
tion. “The proposition, he writes, must, to be sure, be qualified by an
important fact. When a factory spews smoke on a thousand homes, the
ideal solution is to arrange a compensation system whereby the home-
owners pay the factory to install smoke reduction devices up to the
point where the marginal cost of smoke reduction equals the sum of the
marginal gains to the homeowners. But the costs of this transaction may
be prohibitive—of getting the people together, of assessing damages,
and so on—so only a statutory intervention may be feasible” (Stigler
1966: 113–4). This is certainly the reason why the solutions to many
externalities are public. In his view, “[t]he differences between private
and social costs or returns have provided a fertile field for public con-
trol of economic activity. In fact one can attribute most limitations on
private ownership or control of property to this source. These controls
are of every degree of perspicacity, ranging from traffic controls (where
private contracts between rapidly converging drivers would be difficult
to arrange) to petroleum import restrictions (designed to conserve the
supply of domestic petroleum!)” (Stigler 1966: 114).
The “Coase theorem” was important to Stigler, as illustrated by the
fact that he returns to it several times. We have already mentioned his
own recollections (Stigler 1988; Kitch 1983), and the fourth edition
of The Theory of Price (Stigler 1987). In 1972, Stigler published a short
article on the complementary roles of law and economics to formulate
economic policies, in which a few lines were devoted to the “theorem”.
In his Nobel address (Stigler 1982), the Coase v. Pigou debate is exam-
ined as a particular case of how new economic ideas are accepted in the
market for ideas.6 Stigler’s thesis is that the choice between Coase and
456    
E. Bertrand

Pigou was not decided by critical empirical tests but by a comparison of

their heuristic power. In another reflexive article on economics, Stigler
(1984) examines how economics is mobilized in different domains
(law, history, sociology, politics), and of course the “Coase theorem”
is discussed as an example, in the case of law, of the role economists
can play. He writes a specific commentary on the “theorem” in 1989,
actually two commentaries—on testing the “theorem” and on income
effects. The first one is repeated in his 1992 article on law and econom-
ics, which adds a discussion on what “efficient law” could mean.7

Coase’s Reactions to This Baptism

How did Coase react? He accepted the fatherhood of the notion Stigler had
baptized. This was first made explicit in his “Notes on the problem of social
cost”, a new chapter introduced in his 1988 collection, in which he wrote:
“I did not originate the phrase, the ‘Coase Theorem’, nor its precise formu-
lation, both of which we owe to Stigler. However, it is true that his state-
ment of the theorem is based on work of mine in which the same thought
is found, although expressed rather differently” (Coase 1988: 157).
Indeed, the first difference is in the vocabulary. Stigler uses Pigovian
language in terms of equalization of private and social costs, while
Coase reasons in terms of maximization of the value of production.
“There is, however, no inconsistency” (Coase 1988: 158). Stigler’s for-
mulation of the “Coase theorem” is appropriate in the sense that if
private cost equals social cost, the minimization of the former by each
agent entails the minimization of the latter and the total value of pro-
duction is thus maximized. Coase explains as follows why Stigler’s for-
mulation, although using another vocabulary, accurately translates what
he meant in “The Problem of Social Cost”: “Social cost represents the
greatest value that factors of production would yield in an alternative
use. Producers, however, who are normally only interested in maximiz-
ing their own incomes, are not concerned with social cost and will only
undertake an activity if the value of the product of the factors employed
is greater than their private cost (the amount these factors would earn in
their best alternative employment). But if private cost is equal to social
 George Stigler, the First Apostle of the “Coase Theorem”    
457

cost, it follows that producers will only engage in an activity if the value
of the product of the factors employed is greater than the value which
they would yield in their best alternative use. That is to say, with zero
transaction costs, the value of production would be maximized” (Coase
1988: 158, his emphasis).
The second difference between Stigler’s and Coase’s “Coase theorems”
lies in their explicit assumptions. In the same “Notes”, Coase rejects the
necessity of Stigler’s assumption of perfect competition, the assumption
of zero transaction costs being sufficient in his view. He makes clear that
“it would seem that even the qualifying phrase ‘under perfect competi-
tion’ can be omitted” (Coase 1988: 175). Stigler’s implicit assumptions
are detailed and showed to be identical to Coase’s ones in the following
section.
The third apparent difference lies in what Coase and Stigler do with
this “theorem”. Coase repeated in his Nobel address that he did not reject
the “theorem”, which he formulates as follows. “What I showed in that
article, as I thought, was that in a regime of zero transaction costs, an
assumption of standard economic theory, negotiations between the par-
ties would lead to those arrangements being made which would maxi-
mize wealth and this irrespective of the initial assignment of rights. This
is the infamous Coase theorem, named and formulated by George Stigler,
although it is based on work of mine. Stigler argues that the Coase theo-
rem follows from the standard assumptions of economic theory. Its logic
cannot be questioned, only its domain (Stigler 1989: 631–3) [see below].
I do not disagree with Stigler” (Coase 1992: 717). That being said, Coase
insists that what interested him was the study of a world with positive
transaction costs: “However, I tend to regard the Coase theorem as a step-
ping stone on the way to an analysis of an economy with positive transac-
tion costs” (Coase 1992: 717). Coase has regularly been far more critical
of the “Coase theorem” and its unrealism, claiming for example that “[w]e
do not do well to devote ourselves to a detailed study of the world of zero
transaction costs, like augurs divining the future by the minute inspection
of the entrails of a goose” (Coase 1981: 187).
Reconciling Coase’s recognition of paternity with his dismissal of
the “Coase theorem” requires identifying the roles that the assump-
tion of zero transaction costs plays in his argument. Coase’s “Coase
458    
E. Bertrand

theorem” had three roles in Coase’s works (Bertrand 2010): critical

(of the Pigovian tradition, its analysis and policy proposals), heuristic
(bringing to light the influence of transaction costs), and normative
(in the derivation of policy prescriptions—namely lower transaction
costs and allocate the property right to whoever values it the most).
What about Stigler? As Marciano (2018) argued, he transformed
Coase’s argument in a logical and general theorem—unrealistic assump-
tion being not a problem at all, in line with Friedman’s credo. But he
also insisted on transaction costs and the role of law. So what was the
meaning of his “Coase theorem”? And what did he do with it?

The Significance of Stigler’s “Coase Theorem”

Even if its statement takes the form of a theorem, it is not one. Stigler’s
(1966) argument contains no demonstration, but is led by numeri-
cal examples. The assumptions are not explicit; and what Stigler calls
“symmetry” mixes reciprocity and independence. This section will
explore the meaning of Stigler’s argument. I will focus on the assump-
tion about exchange, then on the conclusions of efficiency and inde-
pendence (and on their consequences).

The Meaning of the Assumption of Perfect Competition

Let me first recall the nature of Coase’s argument, which is also

based on a numerical example. Coase mentions the assumption of
perfect competition (1960: 5 and 6) for the markets for corn and cattle
(the prices of corn and cattle are given). In his first example of bilat-
eral negotiation, the rancher, liable for the damage caused by his cat-
tle, signs an agreement with the farmer by which the latter abandons
his culture in exchange for a payment falling between the farmer’s net
profit and the amount of the damage, since “… [t]here is clearly room
for a mutually satisfactory bargain” (Coase 1960: 4). Although Coase
sets this bargaining process within a framework of perfect competi-
tion—since the agents take the price of the commodities as given (meat
 George Stigler, the First Apostle of the “Coase Theorem”    
459

and wheat)—they make the price of the externality, and the price is thus
indeterminate. “What payment would in fact be made would depend
on the shrewdness of the farmer and the cattle-raiser as bargainers”
(Coase 1960: 5). The final result is optimal since all the mutually sat-
isfactory bargains are assumed to be struck: “… if such market transac-
tions are costless, such a rearrangement of rights will always take place
if it would lead to an increase in the value of production” (Coase 1960:
15). What Coase envisages is therefore an island of bilateral bargaining
­(price-making) in an ocean of perfect competition (price-taking). And
Stigler will respect this framework.
Stigler (1966) does not explicitly mention the assumptions of zero
transaction costs and defined property rights (although they are implicit
in his examples), but only that of perfect competition. Perfect compe-
tition means that prices are parametric for the individuals. This is con-
firmed in Stigler’s Chapter 5, whose first sections deal with “the market”
and “the competition”. A market is characterized by a unique price for
the product.8 Stigler makes clear that a perfect market is centralized: “in
a perfect market no buyer ever pays more than any seller will accept,
and no seller accepts less than any buyer will pay. These conditions
can be met only in a completely centralized market, which is approx-
imated by a few exchanges such as the New York Stock Exchange”
(Stigler 1966: 87). Among perfect markets, a competitive one is a mar-
ket where prices are parametric, “in which the individual buyer or seller
does not influence the price by his purchases or sales” (Stigler 1966:
87). Since in Stigler’s example the farmer and the rancher negotiate the
amount of the money transfer, this is not perfect competition. Stigler’s
detailing of the conditions under which a “perfectly competitive mar-
ket” arises removes any doubt that the rancher–farmer situation is not
perfectly competitive: perfect knowledge (otherwise, there is “scope
for haggling, and to this extent a situation termed bilateral monopoly
arises”); large numbers (“there must be many buyers or sellers if each
is to have no appreciable influence upon the price, and they act inde-
pendently”); product homogeneity; and divisibility of the product
(Stigler 1966: 88).
Externalities are by definition external to the market, they have no
price. This definition is made explicit in the 1987 edition of The Theory
460    
E. Bertrand

of Price. After his section on private costs and social costs, which almost
exactly replicates that of 1966, Stigler adds a new subsection on “The
discovery of externalities” (121) in which he states that “by definition,
explicit transactions do not take place in externalities and therefore no
explicit prices are quoted for (e.g.) smoke damage”. Or again, “[e]xter-
nalities are not traded in, by definition: people who are affected are not
parties to transactions such as producing smoke” (Stigler 1987: 121).
And externalities are a common problem, since “[t]here can be no
doubt of the existence of these external effects of an individual’s behav-
ior. In fact, in strictest logic there are very few actions whose entire con-
sequences accrue to the actor” (Stigler 1966: 110).
Since they have no price, a solution could be to give them a price, as
each commodity has in a perfectly competitive market. This is not the
solution proposed by Stigler. Perfect competition cannot solve the prob-
lem, since two agents will haggle over the price of the externality. The
solution envisaged in the section on “Private and social costs” is bilateral
monopoly, i.e. bilateral bargaining.9 Like Coase, Stigler mentions the
assumption of perfect competition for the markets for corn and cattle,
but between the farmer and the rancher this is in fact a bilateral nego-
tiation (price-making). The perfect competition assumption does not
concern the exchange between the rancher and the farmer.

Efficiency: Conclusion or Assumption?

In Stigler’s view, the efficiency of these bilateral negotiations is obvi-

ous. There is no demonstration in his 1966 textbook. Stigler will make
explicit in the 1980s some implicit assumptions that make this thesis
self-evident. His writings underline the extent to which efficiency is a
consequence of economists’ usual assumptions: economic (rational)
behavior, complete information and, of course, zero transaction costs.
As early as 1982, Stigler suggests that Coase was only drawing the
consequences of the usual assumptions on behavior: “The Pigovian
theory of external economies was challenged directly by Ronald
Coase, who in effect argued that the Pigovian theory had assumed
­non-economic behavior on the part of the economic actors in a wide
 George Stigler, the First Apostle of the “Coase Theorem”    
461

class of phenomena” (Stigler 1982: 68, my emphasis). It is (or should

be) self-evident for economists that transaction costs are the only obsta-
cle to a mutually beneficial exchange: “Ronald Coase taught us, what
of course we should already have known, that when it is to the benefit
of people to reach an agreement, they will seek to reach it. Reaching
agreement can be costly in time and other resources, so many potential
agreements will not be achieved, but these unachieved agreements will
have been inhibited by the smallness of the benefits or the largeness of
the costs of agreement” (Stigler 1989: 631). The “proof ” is that if there
was a profit opportunity, it would have already been taken. “Does the
proposition require proof? One would think not. It is similar to a prop-
osition in international trade: The prices of internationally traded goods
in two national markets will differ by no more than the cost of move-
ment of the goods between the markets. Suppose I started to test the
proposition and found that a pair of prices differed by more than the
costs of movement. I would immediately abandon the test and embark
on lucrative arbitrage transactions. Similarly, if I found that Coase’s
famous grain farmer and cattle rancher were making foolish decisions
with respect to the damage to grain from wandering cattle, I would buy
the two enterprises and reap a capital gain from an efficient reorganiza-
tion” (Stigler 1989: 631). Stigler expressed the same ideas in the 1992
text: “Coase reminded economists and taught lawyers that, in a world of
exchange by agreement rather than by coercion, the costs and benefits
of agreement determine its scope” (Stigler 1992: 456, my emphasis).
Consequently, besides transaction costs, the only reason why a mutu-
ally beneficial exchange would not be struck is that agents can demon-
strate noneconomic behavior. “There are people who do not care for
wealth, more who do not reason well, and vastly more who are incom-
pletely informed. These people will not necessarily achieve optimal
agreements, and especially is this true in new circumstances” (Stigler
1989: 631). Stigler thus assumes that mutually beneficial exchanges are
realized if information is complete and agents are rational. Empirical
studies of the “theorem” should therefore be directed to transaction
costs and “to the determination of the efficiency of small markets
with special attention to short-run reactions to altered circumstances
(‘shocks’)” (Stigler 1989: 631).10 None of them “is directed to the logic
462    
E. Bertrand

of the Coase Theorem but instead to its domain” (Stigler 1989: 632).11
The logic of the “theorem” is indisputable in Stigler’s view; this is why it
cannot be tested.
However, this “theorem”, if it assumes individual rationality, com-
plete information, and zero transaction costs, is in fact disputable, since
these assumptions are not sufficient to establish efficiency.
One must assume, in addition, the efficiency of bilateral bargain-
ing because bargaining does not exclude, even in these conditions, an
inefficient result. The fundamental criticism leveled at the resolution of
externalities by bargaining rests on the problem of the distribution of
the exchange surplus. If the agents, who maximize their own part of the
surplus, do not agree on its distribution, the mutually beneficial bargain
is not struck and the result is then suboptimal, even if transaction costs
are nil. Paul Samuelson writes, referring to Coase (1960):

Let us be clear, though, that the rational self-interest of each of two free
wills does not necessitate that there will emerge, even in the most ideal-
ized game-theoretic situation, a Pareto-optimal solution that maximizes
the sum of the two opponents’ profits, in advance of and without regard
to how that maximized profit is to be divided up among them. Except by
fiat of the economic analyst or by his tautologically redefining what con-
stitutes “nonrational” behavior, we cannot rule out a non-Pareto-optimal
outcome. We can rule it out only by Humpty-Dumptyism. (Samuelson
1967: 35, his emphasis)

This criticism was also leveled at the “Coase theorem” by, in particu-
lar, Regan (1972), Arrow (1979), Cooter (1982), Veljanovski (1982),
and Coleman (1984). William Samuelson clearly poses the problem,
distinguishes the possible strategic behaviors, and stresses that the con-
flict over distribution is not solely due to an undetermined result or to
incomplete information:

The presumption is simply that such agreements [preferred by both sides]

can and will be reached since it is in the joint interest of the parties to
do so. Although this conclusion is appealing, it is considerably stronger
than the economist’s customary hypothesis of individual rationality.
 George Stigler, the First Apostle of the “Coase Theorem”    
463

Even under perfect information, this presumption is far from obvious.

Each individual seeks only to maximize his individual utility and does
not seek a point on the utility-possibility frontier per se. Moreover, in
any interesting problem, there will be a multiplicity (in fact, an infinity)
of efficient agreements – such that an improvement in one agent’s wel-
fare necessitates a sacrifice in the other’s. Thus, one would expect the
agents to negotiate (or haggle) over these candidates – a process that may
in turn expend resources and delay agreement. Other types of strategic
behavior are also possible. In pursuit of a preferred agreement, one party
may threaten the other and, for credibility’s sake, bind himself to carry
out the threat some portion of the time. When he does, efficiency fails.
Alternatively, the parties may adopt the standard negotiation bluff, insist-
ing on ultrafavorable (and incompatible) terms of agreement. If agents
persist in these demands, a mutually beneficial agreement may be lost.
(Samuelson 1985: 322, his emphasis)

Stigler’s “Coase theorem” is indisputable because it adds to usual

assumptions an assumption of efficiency of bargaining. More clearly,
Stigler mixes the assumption and conclusion of efficiency, as for exam-
ple when he says: “Ronald Coase taught us, what of course we should
already have known, that when it is to the benefit of people to reach an
agreement, they will seek to reach it” (Stigler 1989: 631). What Stigler
says that Coase “taught” us is in fact Coase’s assumption, and not his
result. But Coase’s insight, according to Stigler, is that he brings to light
the consequences of this efficiency assumption.
This thesis had in Stigler’s view an empirical counterpart, as illus-
trated by his argument about the actual impossibility of unexploited
mutual gains. Stigler seemed to think that externalities are for the
most part already internalized or on the verge of being internalized.
As recounted by Claire Friedland, “[h]e described externalities as that
for which there are no transactions at the present time ” (1993: 781, her
emphasis). In other words, externalities are a problem that markets can
handle in practice. Applying his methodology to this specific case, we
understand that Stigler was not so much interested in the details of the
theorem, or in the modelization of bargaining, than in its application to
the real world (see Freedman’s [2016] interview with Peltzman).
464    
E. Bertrand

Mixing assumption and conclusion, Stigler thus makes the assump-

tion that mutually beneficial negotiations take place into the true result
of the “Coase theorem”. This is the first heuristic role of the “theorem”
in Stigler’s view.

The Consequences of the Efficiency Thesis

Its second heuristic role is that it is a means to examine the world with
zero transaction costs, in order to stress their influence in the real eco-
nomic system and the necessity of introducing them in the analysis,
even if Stigler neither engaged himself on these paths.
In his 1988 memoirs, Stigler insists on how revolutionary it was to
think about the world of zero transaction costs. Following Coase’s invi-
tation to assume zero transaction costs “seemed reasonable because eco-
nomic theorists, like all theorists, are accustomed (nay, compelled) to
deal with simplified and therefore unrealistic ‘models’ and problems.
Still, zero transaction costs are a bold theoretical construct. It implies, for
example, that in buying an automobile one knows the prices all dealers
charge (with no cost to anyone in time or money), that one is completely
certain what all warranties for replacement of defective parts or provision
of services mean and has complete confidence that they will be fulfilled
(without controversy), and so on. Zero transaction costs mean that the
economic world has no friction or ambiguity” (Stigler 1988: 75).
Like Coase, Stigler draws the consequences of the zero transaction
cost assumption, absurd as they may be, in order to stress the need for
introducing positive transaction costs in the analysis: “The same amount
of smoke would be released from the factory’s chimney whether the
factory owner or the householder was legally responsible for the smoke
damage. If this proposition strikes you as incredible on first hearing,
join the club. The world of zero transaction costs turns out to be as
strange as the physical world would be with zero friction. Monopolies
would be compensated to act like competitors, and insurance com-
panies and banks would not exist. The Coase analysis has emphasized
the urgent need in economics for a general theory of transaction costs”
(Stigler 1972: 11–2).
 George Stigler, the First Apostle of the “Coase Theorem”    
465

That this assumption of zero transaction costs is unrealistic is also

often acknowledged, as here: “The Coase theorem is not realistically
applicable when many parties are concerned—for example, when one
seeks to control a factory whose chimney spews noxious pollutants on
five thousand households—because it is too costly for the factory owner
and the thousands of households to contract with each other” (Stigler
1984: 305).
It is a consequence of transaction costs that, in terms of economic
policy, it seems that the “Coase theorem” does not really change Stigler’s
treatment of externalities in his textbook. In the 1987 edition of his
Theory of Price, at the end of the section on private costs and social costs
(p. 120), Stigler refers to a new Chapter 20. In this chapter, there is a
section on “The detection of externalities” that takes into account
the consequences of “The discovery of externalities”, the new subsec-
tion added in the chapter on costs and production. He writes here that
“[e]xternal effects are by definition not part of the contracts of purchase
and sale in which most economic transactions are effected—if they were
negotiated, they would not be external to the parties” (Stigler 1987: 327).
This means that if transaction costs are so low that a negotiation occurs,
then the externality as such disappears. But if this is not the case because
of transaction costs, then the externality remains and will have to be cor-
rected by the traditional Pigovian solutions. Indeed, the following section
on “The correction of externalities” resembles the traditional analysis of
externalities. First, the definition of externality is Pigovian: “The existence
of externalities can be presented as a difference between the marginal pri-
vate and marginal social products of a resource, where the private prod-
uct accrues to the person utilizing the resource and the social product
includes all effects of the use of the resource upon others” (Stigler 1987:
328). Then the problem is posed in traditional terms: “The allocation
of privately owned resources is governed by their private return, and to
maximize his return, the owner of the resource will allocate it so its mar-
ginal private product is equal in all uses. But to maximize total income
of the society, it is the marginal social product of a resource that should
be equalized in all uses. How is this to be achieved?” (Stigler 1987: 328).
Finally, the solutions are also traditional: “The direct ‘solution’ is simply
to tax activities yielding external diseconomies and subsidize activities
466    
E. Bertrand

yielding external economies” (Stigler 1987: 328). But because this taxa-
tion is not always feasible, there is a variety of other policies: (1) “The
need for contracting may be removed by an assignment of rights” (such
as zoning); (2) direct regulations; and (3) direct provision of reparations
for negative effects (Stigler 1987: 329–30).
The introduction of transaction costs into the analysis also implies
that economists should pay attention to aspects of the law. This is clear
as early as 1972, when Stigler explains that the law is not only a condi-
tion for contracts but also an alternative to them when they are impos-
sible: “The development of a theory of [transaction] costs is a task for
economists, but an integral part of that task is the understanding of the
legal processes which may be employed. Economic life requires relia-
ble commitments by the transactors, and economic disagreements call
for methods of resolution. The civil law and private arbitration are the
peaceable methods by which a society achieves commitments and con-
ciliation. It comes as more of a surprise to the theoretical economist, I
am sure, than to his legal brethren that economic order has deep rela-
tionships to legal order” (Stigler 1972: 12). If transaction costs impede
exchange then the role of law is to reconcile opposite interests: “Law,
like other social institutions, came to be viewed by economists as an
instrument for the organization of social life” (Stigler 1992: 456).
The part of Stigler’s “Coase theorem” that draws the conclusion of effi-
ciency is circular because it assumes efficiency in bilateral bargaining. It
has, however, a heuristic role: to bring the conclusions of economic theory
to completion, which leads then to a study of the p­ ositive-transaction-costs
world. Its third heuristic power is to pose the question of the independ-
ence of the result in a specified theoretical framework. Independence was
indeed not self-evident at all.

Independence: Argument and Consequences

There is a third heuristic role for the assumption of bargaining effi-

ciency: the independence thesis. While the efficiency conclusion is con-
sidered by Stigler as self-evident, the independence thesis is not, and to
him this is Coase’s important result. In his first statement of a “Coase
 George Stigler, the First Apostle of the “Coase Theorem”    
467

theorem” in 1966, Stigler puts the stress on what would be Coase’s main
insight: the independence of the result. And in his later commentaries
on the “theorem”, Stigler will each time insist on the novelty of this the-
sis (as opposed to the not-so-new efficiency thesis). For example: “In
1961, my colleague Ronald Coase demonstrated in a powerful article
that this analysis of external effects was wholly superficial. If transac-
tion costs were zero, all parties to any economic activity would contract
with respect to all benefits or detriments—there would be no external
effects. This is obvious enough, but what was extraordinarily unobvi-
ous was the Coase theorem that the manner in which legal rights were
assigned would have no effect whatever upon the methods of produc-
tion” (Stigler 1972: 11).
In 1966 examples, independence is based on the use of the concept
of opportunity cost, as in Coase. It is certainly not by mere chance that
the section on “Private costs and social costs” is preceded by a section
entitled “The nature of costs”, which makes clear that real cost is not
historical cost but opportunity cost. Indeed “the cost of any productive
service to use A is the maximum amount it could produce elsewhere.
The foregone alternative is the cost” (Stigler 1966: 105). Coase’s argu-
ment, both in “The Problem of Social Cost” and during the night of
discussion where Stigler was present, was indeed based on use of the
opportunity cost concept.12 During that night it was the independence
result that posed problems for the other participants, and it was Coase’s
argument in terms of opportunity costs that convinced them.
Remember that in his cattle and crops example, Coase asserts that in
both allocations of rights the rancher faces the same marginal production
costs, since “a receipt foregone of a given amount is the equivalent of
a payment of the same amount” (Coase 1960: 7). In Coase’s recol-
lection, this was the very idea that convinced the participants of the
Chicago seminar who first had rejected the “Coase theorem” idea: “I
remember at one stage, Harberger saying, ‘Well, if you can’t say that the
marginal cost schedule changes when there’s a change in liability, he can
run right through’. What he meant was that, if this was so, there was
no way of stopping me from reaching my conclusions. And of course
that was right. I said, ‘What is the cost schedule if a person is liable, and
what is the cost schedule if he isn’t liable for damage?’ It’s the same. The
468    
E. Bertrand

opportunity cost doesn’t shift. There were a lot of other points too, but
the decisive thing was that this schedule didn’t change. They thought
if someone was liable it would be different than if he weren’t” (Coase
1997). This is the same argument in Stigler’s (1966) example described
above.
When Stigler generalizes his example, the independence of the final
allocation is due to the efficiency thesis and the uniqueness of the opti-
mal result. The optimal allocation is the allocation that would be cho-
sen by a single owner, or a planning authority, who maximizes the sum
of profits. If it is assumed that there is only one optimal allocation of
crops and cattle and that this optimum is reached whatever the initial
distribution of rights is, then of course the same result is reached. It was
already the case in the 1966 textbook, and it is repeated here: “Coase’s
conclusion can be reached by the following argument. It is clearly desir-
able that the sum total of the produce of the two farming enterprises be
as large as possible, for then each farmer can receive more than when
there is a smaller pie to be divided. If the rancher is responsible for the
damage, he will erect the fence or reduce his herd or pay for the grain
damage, or pay the farmer to grow less grain, whichever is cheaper. If
the farmer is responsible, exactly the same action will be chosen, except
that now he compensates the rancher. In short, with either legal rule
the same farming practices will be used as if the two farms were jointly
owned” (Stigler 1984: 304–5, his emphasis).
In the 1987 edition of his Theory of Price, Stigler makes one conces-
sion to the independence thesis. More accurately, while accepting the
major criticism of the independence thesis in terms of income effects,13
he is defending that this thesis nevertheless holds in the long run (when
there is some stability of the rights). “Such [income] effects are clearly
present when legal rights are suddenly changed: the new holder of rights
has gained and the new holder of liabilities has lost. The effect comes
from the unexpectedness of the reassignment of rights, and such income
effects are not likely to be important if the legal rules have long been
unchanged” (Stigler 1987: 120).
The argument is developed in his second 1989 note on the “Coase
theorem”. If there is perfect competition on the corn and meat markets,
and on the markets for lands for growing cattle and raise corn, the usual
 George Stigler, the First Apostle of the “Coase Theorem”    
469

equality theorems will apply. An anticipated change in the law will

therefore not change the distribution of incomes, nor by consequence
the allocation of resources. “The Coase Theorem is of course consistent
with the fundamental theorem of competitive markets, that homoge-
neous resources receive equal returns in all uses.14 The state may shift
rights from one party to another and confer short-run gains and losses
… In the long run, however, the various parties will continue to earn
only competitive rates of return, and even in the short run the Coase
theorem allows the allocation of resources to be unaffected. A stable
property or tort law, to repeat, would not affect the distribution of
income” (Stigler 1989: 632–3).
The invariance thesis has consequences for understanding the neces-
sity and the effect of law, even in the zero-transaction-cost world. This
is why this thesis is so important: “An immensely influential article by
Ronald Coase, in which the law played a role that oddly enough was
both indispensable and incidental, is the example I choose to portray
the economist’s role. Coase asked the question: does it matter where
legal rights and responsibilities are placed, so long as they are placed on
definite persons? … His astonishing answer was, no, it will make no
difference. The assignment will not affect the number of cattle or the
amount of grain or the precautions taken to reduce damage. For lawyers
in particular, this conclusion went, I may say, against the grain” (Stigler
1984: 304).
Even if this positive thesis may be useful for normative purposes,15
Stigler favors a “positive theory of law”, “a general theory of the deter-
minants of the laws of torts, property, contract, and other branches of
the law. … [L]egal scholarship would seek to explain, not just what the
law should be, but why it is what it is” (Stigler 1984: 305). It is in this
explanation that the economist has a part to play: “If the overwhelm-
ingly normative orientation of legal writing should be redirected to the
explanation of legal institution and their evolution, there will be a place
for economic analysis in legal scholarship” (Stigler 1984: 312). The legal
goals should indeed be left to lawyers.
This is why Stigler departs from Posnerian economic analysis of the
law (Stigler 1992: 459). The goal of the law is justice, and the econo-
mist cannot discuss this role, since “efficiency is to be judged only with
470    
E. Bertrand

respect to the goals one seeks” (Stigler 1992: 459). The economist can
only evaluate the efficiency of the means to achieve this goal, and help
to explain rational behavior. “The difference between a discipline that
seeks to explain economic life (and, indeed, all rational behavior) and a
discipline that seeks to achieve justice in regulating all aspects of human
behavior is profound. This difference means that, basically, the econ-
omist and the lawyer live in different worlds and speak different lan-
guages” (Stigler 1992: 463).
Therefore, in Stigler’s view, on the one hand economics should take
into account law because law is necessary for exchanges and may be
alternative to them, and on the other hand economics could contribute
to the positive analysis of the law.

Conclusion
A few years after having been converted to Coase’s argument on the
efficiency of costless negotiations over externalities, Stigler invented the
“Coase theorem”.
Stigler’s understanding of “The Problem of Social Cost” was close
to Coase’s. Like him, Stigler posed the problem in terms of bilateral
bargaining in an ocean of perfect competition. As with Coase, the effi-
ciency thesis permitted drawing the consequences of the economists’
assumptions and studying the independence result. As with Coase, it
was important because it brought to light the role of transaction costs
and of the law.16 All this explains Coase’s ambiguous attitude toward
Stigler’s naming. He did not deny his paternity but he rejected the
economists’ focus on the “theorem”.
Nevertheless, Stigler’s statement of the “Coase theorem” was inap-
propriate on two counts. First, it was neither Coase’s language nor his
message. Second, it was not demonstrated as a theorem. We can
now add a third count, the same as Coase’s. Beginning with the
­zero-transaction-costs world in order to show the importance of transac-
tion costs did not prove to be an efficient heuristic device, since econo-
mists focused on that world and stayed in it. Since these mistakes had been
made in a textbook, the “Coase theorem” gained fame and economists
 George Stigler, the First Apostle of the “Coase Theorem”    
471

persisted with the name. The “Coase theorem” seemed to demonstrate the
efficiency of bargaining without the weighty assumptions of perfect com-
petition (even while it was assuming it). Stigler’s name and his statement
of it certainly contributed to giving the “theorem” its importance. Stigler
claimed the status of a theorem for an assertion that was not demonstrated,
and was at best circular. This gave a demonstrative power to a statement
that in fact possessed none. Moreover he did this in a textbook, as if it were
already an established result whereas it was addressed in only a very few
academic articles, mainly in a critical tone. As Medema wrote (2011: 12):
“Stigler’s remaking of Coase’s idea into a ‘theorem’ had significant rhetor-
ical power, which, combined with the challenge that it posed to received
thinking about externality problems, both lent credibility to the idea and
made it a force to be reckoned with”.
At an epistemological level, the drive to label as a “theorem” an
assertion that was not formally proven or was at best circular is not
simply testament to a failure of awareness or excessive enthusiasm.
It also shows the peculiar nature of many of the assertions that econo-
mists find meaningful—assertions which cannot be reduced to demon-
strable results, but draw their power from preexisting beliefs, or single
examples.

Acknowledgements   I thank Craig Freedman and Steven Medema for their

useful comments on an earlier version. Errors and omissions remain mine.

Notes
1. The term “conversion” is also used by Medema (2011: 24).
2. The two other cases are land tenancy, and economies external to the
firm but internal to the industry.
3. But note that Medema (2019) calls into question the actual existence
of such a Pigovian tradition before Coase’s article, and also that Coase
misinterprets Pigou (see Bertrand 2010 and the references therein).
4. The assumption of zero transaction costs is not absent from the 1959
article, nor are the consequences of high transaction costs (Coase 1959:
27, fn 54).
472    
E. Bertrand

5. This sentence disappears in the next (and last) edition of The Theory of
Price (Stigler 1987).
6. It is interesting to note that Coase tackled the same topic in a 1981
conference published in 1982.
7. We will analyze these articles later; for a different and sometimes more
detailed exposition of most of them, see Medema (2011).
8. “A market, according to the masters, is the area within which the price
of a commodity tends to uniformity, allowance being made for trans-
portation costs” (Stigler 1966: 85).
9. The solution in terms of perfectly competitive markets would have to wait
for Arrow (1969). See Berta and Bertrand (2014). The bargaining ver-
sion of the “Coase theorem” is adopted by, for example, Turvey (1963),
Calabresi (1968: 68), and Dahlman (1979: 142) (see Bertrand 2019).
10. Here again, Stigler repeats these ideas in his 1992 article (457–8).
11. The delimitation of the domain of applicability of a theory is important
in Stigler’s methodology (Marciano 2018).
12. On the centrality of the concept of opportunity cost in Coase’s argu-
ment, see Bertrand (2015a, b).
13. If liability changes, revenue changes, and then demand for commodi-
ties including the commodity at the origin of the external effect. This
criticism was for example leveled at Coase’s argument by Turvey (1963:
310), Dolbear (1967: 91), and Mishan (1967).
14. This formulation confirms Medema’s (2011) conjecture that Stigler

formulated the “Coase theorem” in the manner of the first theorem of
welfare economics.
15. “This result, now called the Coase theorem, raises a host of questions
about the purpose of legal rules and the criteria by which they are cho-
sen, and for the reformer, the criteria by which they should be chosen”
(Stigler 1984: 305).
16. For the differences with Coase’s exact message, see Medema (2011).

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